When to review your strategy, when to leave it alone, and how to tell the difference

At the same time, as Centaur Financial Services CEO Hugh Robertson explains, there is a difference between reviewing a portfolio and re-writing the strategy.

“A portfolio might need checking regularly, particularly around income, asset allocation, cash levels, tax, and whether anything has drifted too far from where it should be. But the strategy itself should not be pulled apart every time markets have a bad month.”

Both Robertson and Viola Private Wealth’s Alex Thompson put the frequency of a strategy evaluation at roughly once a year, while any major life changes should also trigger a deeper look.

But knowing when to review is only part of the story. More important is understanding how to assess whether the strategy is meeting its objectives, how to fix the issues, and the mistakes you need to avoid.

In the words of Anton Chigurh in No Country for Old Men: “If the rule you followed brought you to this, of what use was the rule?”

Is your strategy working?

It sounds like an easy question, but how can you really tell? In order to work that out, the first step is figuring out what you are ultimately trying to achieve with the money.

“For one client that might be targeting a specific amount of income or focusing on longer term growth to fund lifestyle in the future,” Thompson says.

“When we first set out the strategy, we model out the projected outcomes to provide guidance as to whether the objective is realistically achievable or not.”

Similarly, Robertson explains that it all comes down to whether the strategy is doing the job it was intended to do. Under that rubric, a good review starts with the investor's original goals:

• What return was needed?
• What level of risk was acceptable?
• What income was required?
• What timeframe was assumed?

“Then compare the portfolio against those measures. If the strategy is broadly on track, sensible investors resist the temptation to fiddle,” Robertson says.

“If it is off track, the next question is whether the problem is the strategy, the investments, the assumptions, or simply normal market noise.”

More than just returns

The most important metric for every investor is invariably going to be returns. No one wants to be stuck in an underperforming fund and it’s hard to avoid the feeling that your money could be working harder.

The problem comes from only looking at returns without the broader context of how they were achieved and whether your portfolio is aligned with your strategy.

“Returns matter, of course, but they are only one part of the story. A strategy can underperform for a year and still be sound. Equally, a strategy can make money and still be wrong if it took too much risk, created too much tax, produced no reliable income, or left the investor unable to sleep at night,” Robertson says.

One of the clearest warning signs that a strategy might need an overhaul is when a portfolio is no longer on track to achieve its intended objectives.

“For example, if the projected balance or income funding levels are falling materially short of what is required within a reasonable timeframe, it may indicate that the strategy needs to change,” Thompson says.

“Another is behavioural, it could show up in high levels of client stress or anxiety, evidencing that the strategy may be outside their comfort levels. Another marker is evidence of portfolio drift, where asset allocations have gradually moved away from their intended targets, potentially leading to more risk or unintended outcomes. One way to think about risk is getting an outcome you didn’t expect.”

What’s the next move?

If you have looked through your strategy and realise it is no longer fit for purpose, then something will have to change. According to Thompson, this needs to be done within an understanding of whether the strategy itself has failed or if your circumstances have evolved.

“We need to ensure that the strategy is aligned with the client’s intention and what they are trying to achieve, rather than being stubbornly focused on circumstances that existed when it was first established. They may have retired earlier than expected, sold their business, received an inheritance or simply have different priorities as time goes on,” he says.

“Once those changes have been identified, we effectively return back to first principles. We revisit the goals, the objective, timeframe, cashflow needs, risk tolerance, tax or structural considerations. Only once those foundations have been reassessed can we then go about forging a new strategy.”

Robertson adds that the solution is not to just rush out and find the next best idea, it has to work within the overall strategy.

“Every investment in a portfolio should have a job, whether that is income, growth, defence, inflation protection, diversification, or liquidity.”

Mistakes you need to avoid

While both Robertson and Thompson stress the importance of every investment needing to have a specific purpose within the broader portfolio, far too often investors skip past the step of defining these roles.

“The most common mistake is confusing an investment strategy with a collection of investments. Owning a few funds, some shares, and a term deposit is not a strategy. It is just a shopping basket. A real strategy explains why each part is there and what job it is meant to do,” Robertson says.

Another common mistake is assessing the strategy with the benefit of hindsight and getting caught in the short-term noise.

“They chase what has just performed well, abandon what has recently disappointed them, and forget that markets tend to reward patience more than enthusiasm. The result is often buying high, selling low, and calling it active management,” Robertson says.

Thompson agrees, particularly when it comes to a plan that is designed to perform over a 15-20 year period.

“What happens over the next two months is almost irrelevant as it’s such a short window. People often feel compelled to make changes during periods of volatility or after seeing periods of strong returns,” he says.

“It leads to classic behavioural biases and more often than not leads to poorer outcomes. The most successful ones are those who remain disciplined, stay focused on their objectives.”

Alex’s investment strategy tips

Start with the objective and work backwards from there. There’s no point in trying tinker with a strategy if you’re not clear on the objective. As I say, a portfolio is just a means to an end, be clear about what you want the money to do, how much risk are you willing to take, what level of income or growth you need and at what timeframe will you need to access your capital.

Whilst we don’t want consistent periods of weakness, investors should also accept that no strategy will outperform in every market environment. Therefore, be clear about the rationale behind the strategy, be disciplined on the fundamentals and when markets inevitably wobble, stay focused on the long-term plan.

Hugh’s investment strategy tips

Write the strategy down. If it is only in your head, it will change depending on the latest headline, barbecue conversation, or market fall. A written strategy gives you something to come back to when emotions are running hot.

Keep it simple enough to explain to your spouse, your accountant, or your future self for when you start to panic. Be clear on the purpose of each bucket of money. Have enough liquidity so you are not forced to sell good assets in bad markets. Diversify properly. Watch costs and tax. Rebalance when needed. 

Most importantly, remember that the best strategy is not the one that looks clever in a spreadsheet. It is the one that you can stick with through good markets and bad.